In Ohio, shareholders in a close corporation have fiduciary duties to one another. A close corporation is generally characterized as a corporation with few shareholders who own shares that are not traded on a securities market. Additionally, in a close corporation management and ownership typically overlap, restrictions exist on the free transfer of shares and there is an unmistakable resemblance to partnerships.
Because a close corporation resembles a partnership, the relationship between the shareholders must be one of trust, confidence and loyalty. Generally, Ohio courts impose a heightened fiduciary duty on majority or controlling shareholders in close corporations to protect against abuse and oppression of minority shareholders. This abuse or oppression includes a squeeze-out or freeze-out or the manipulative use of corporate control to eliminate minority shareholders, or to reduce their share of voting power or percentage of ownership assets or otherwise unfairly deprive them of advantages or opportunities to which they are entitled.
The standard of duty owed by majority or controlling shareholders in a close corporation is the utmost good faith and loyalty. Ultimately, a controlling shareholder in a close corporation may not take action which operates to the disadvantage of the minority if the action was not taken in good faith and for a legitimate business purpose. A breach of this heightened fiduciary duty is actionable so if shareholder issues exist in your business, contact a Cavitch attorney right away.
Tim Warner serves as Chairman of the Cavitch’s Litigation Group. He has successfully litigated a number of shareholder disputes and regularly consults with shareholders regarding corporate governance and ownership issues.